- Avenue Supermarts faces pressure from competition and focus on smaller cities
- HSBC maintains Reduce rating and cuts target price to Rs 3,520 from Rs 3,530
- DMart's pricing edge is slight and crucial for its competitive moat
Avenue Supermarts, which operates the DMart retail chain, remains under pressure from intensifying competition and a store expansion strategy that is increasingly skewed towards smaller cities, according to HSBC Global Research. HSBC has maintained its Reduce rating on the stock while marginally cutting its target price to Rs 3,520 from Rs 3,530. The revised target implies around 5.4% downside from the reference price of Rs 3,720 in the brokerage report.
The brokerage said relative pricing at DMart has improved marginally, but does not see the change as significant enough to materially strengthen the retailer's competitive position.
According to HSBC, the pricing differential for DMart Ready and DMart stores is around 5% and 10%, respectively, versus online peers. The brokerage views pricing as DMart's key competitive moat, making the sustainability of this advantage important for the stock's outlook.
“Pricing is the only moat Dmart has vs other retailers,” HSBC said in its assessment.
Store Expansion Raises Productivity Concerns
HSBC also flagged the company's store addition strategy as a concern. New stores have increasingly been added in areas with populations below one million, while historically DMart's store productivity has been higher in metros and urban markets. The brokerage believes stores in these newer locations may have lower productivity, meaning further expansion into such markets may not necessarily translate into a corresponding increase in productivity.
HSBC expects new DMart stores to achieve around 50% of the productivity of the existing store base, compared with roughly 65% based on the FY23-25 average.
This could keep pressure on the company's revenue per square foot, with HSBC expecting it to remain flat over FY26-29.
The brokerage described the current strategic status quo as disappointing and said it would closely watch whether DMart changes its approach to store additions. HSBC also flagged potential risks from e-commerce, quick commerce and new store formats or private labels, which could affect the company's competitive position.
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